Amazon is sizing up an Ocado buyout, putting Waitrose and Morrisons on alert

Rumours have resurfaced that Amazon is eyeing a bid for Ocado to boost the chances of success for its fledgling grocery arm Amazon Pantry, sending shares of the UK delivery firm soaring and putting grocers Morrisons and Waitrose (which both have deals with Ocado) on alert.

Following a Daily Mail Market Report published today (19 January), which suggested Amazon has "advisers beavering away on a potential move for the British online supermarket”, shares in Ocado jumped 18 per cent to £2.85 per share.

It comes as Amazon looks to ramp up its Pantry offering in the UK following its launch in November. It currently allows customers to buy from a limited range of 4,000 grocery and household products, from big brands such as Kellogg’s, Ariel, Colgate and Kronenbourg, which it will then deliver. It’s looking to add fresh food items to the line-up but will need to invest in a storage and delivery infrastructure that could support it.

A buyout of Ocado could provide that.

Meanwhile, investment banks have reportedly suggested that if Ocado is formally approached with an offer it should consider it, given it’s limited scale in comparison to Amazon Pantry (which would become a direct competitor).

However, it would prove a thorn in the side of Morrisons and Waitrose, both of whom struck delivery agreements with Ocado.

In 2013, Morrisons entered into a 23-year, £216m deal with Ocado in exchange for its e-commerce technology, warehouse, staff and vans. Similarly, since 2009 Waitrose has had a deal with Ocado to deliver its products.

Speaking to The Drum, Neil Saunders managing director at retail analysis firm Conlumino explained that the contractual agreement between Waitrose and Ocado, which runs until 2020, could yet prove a sticking point. Under the terms if Amazon were to buy Ocado it would have to pay Waitrose the greater part of £40m or four per cent of the sale price.

“It was originally designed to protect Waitrose but would obviously be a pain for anyone buying Ocado,” said Saunders. “Waitrose could also terminate its agreement with Ocado, if it so wished. That would be a major blow for Ocado’s new owners as many people use the service to get Waitrose food.”

Meanwhile, Morrisons will also be keeping a close eye on how a potential deal progresses.

It has already been warned by Ocado that under the terms of the contract it would be unable to establish own online offering and so – if bound by the 23-year contract – faces two options.

“One is to be concerned that Amazon is a potential rival that could damage Morrisons longer term; the other is to be agnostic and welcome the expertise and finance Amazon would bring and to see it as an opportunity to grow Morrisons online business,” explained Saunders.

Morrisons certainly wouldn’t be the first retailer to sell through Amazon even though, on paper, it is a competitor.

The challenge for Morrisons is that if the contractual agreement stands then it cannot set up its own rival online service, “a shortsighted decision by previous management that may well come back to haunt Morrisons over the longer term,” suggested Saunders.

Morrisons declined to comment while Amazon and Ocado had not returned The Drum’s request for comment by the time this article was published.

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